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CHARTERED ACCOUNTANTS
Karachi Tax Bar Association
Contact Address:
4th Floor, Central Hotel Building
Civil Lines, Mereweather Road
Karachi - Pakistan
Phone: 021 - 35644872-7
Fax: 021 - 35694573
E-mail: [email protected]
Pre-Budget Proposals
2015 – 16
28th April 2015
Presented by:
ALI A. RAHIM
Director
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
This Presentation has been tabulated according to the following Segments:

Broadening of Tax Base, Promotion of Investment & Employment

Decision required

Other Import Items
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT
This segment comprises of following section:

Amnesty Scheme for local investors

Incentive for industrialization

Cost of doing business

Improvement of Economic indicators


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Tax to GDP ratio
Investment to GDP
Savings in Economy
Long term decision
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT
Amnesty Scheme for local investors:
We welcome the recent announcement of Amnesty for Stock Exchange
General Amnesty to others if announced shall have positive effects for:


Documentation of Economy
Broadening of tax base
Provided:
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Tax rates are reasonable
Proper advertisements to be done in Print & Electronic media.
Elongated period of time is provided to avail the opportunity
No Restriction on assets to be declared
Other Amnesty:
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Tax Rate for first time tax payer
Tax credit upto 50% of the tax liability to be provided to the tax payers filing the tax
return for the first time along with wealth statement, with the condition that past
years will not be probed.
The new tax payers should be given immunity for the past 5 years and their capital
upto 10 times the total income offered for tax should be considered as white, for
investment in productive channel.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT
Incentive for industrialization:

Corporate Tax Rates
The corporation tax rate are as follows:
Pakistan
Hong Kong
34%
16.5%
China
25%
Indonesia
25%
Bangladesh
27.5%
Turkey
20%
Malaysia
25%
Additional impact in Pakistan is WPPF 5%, WWF 2%, therefore effective rate works out to
be 41%.
A low rate of corporate tax encourages investment and induces voluntary payment of taxes,
This should be reduced to 20% over a period of next five years.
The rate of tax on quoted companies should be 5% lower then non-quoted companies to
encourage the companies to get themselves quoted.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT
Incentive for industrialization:

Tax Holiday for New Industrial and Commercial Setup

A flat rate may be levied based on geographical divide urban/rural, income
capacity of the area, and covered area of entity.

It is proposed that this scheme may be introduced to enhance tax base by
levy of flat rate of Rs. 5,000/- and slabed upwards upto 50,000 excluding any
adjustment for taxes deducted at source, per year as income tax and sales tax
if the volume of gross turnover is upto Rs.25 Million.

However, this scheme should clearly state that no documents will be asked
for except CNIC and complete address of the entity to be stated, and the
Entity will not be subjected to Audit.

Tax payer to be given a yearly token by FBR, which should be displayed at the
premises to guarantee that in this case no questions will be asked by Federal
Board of Revenue (FBR).

The tax authorities should only verify that the turnover is not more than 25
Million by applying a formula to be worked out in consultation of the Bar,
Chamber, Market Associations and other stake holders.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT
Improvement of Economics Indicators :

Tax to GDP
Pakistan’s overall tax-to-GDP ratio has remained stagnant at around approximately
9% and, in fact, has shown a decline in recent year to below 9.0 percent. The reason
behind the low tax-to-GDP collection of Pakistan in the world is rampant tax evasion
and a poor collection system. Today, Pakistan has a lower tax-to-GDP ratio than
other Asian countries as follows:
Sri Lanka
13%
Indonesia
15%
Thailand
17%
South Korea
16%
India
16%
Malaysia
14%
Philippines
14%
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT

NADRA Date Base
NADRA date base should be used effectively including information from electricity
and gas distribution companies to identify non taxpayers. FBR has a list of 2.6 Million
persons who:
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Owns at least one property of 500 Sq. Yards or more
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Owns at least one motor vehicle of 1000 cc or more
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Has taken 2 or more foreign trips
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Maintains a bank account
An such persons are not even registered with the FBR.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT
Improvement of Economic indicators:
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Investment to GDP
Low investment and capital formation is recorded as one of the biggest impediment to
sustainable GDP growth in Pakistan. Following table provides status in the regional
countries .
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Pakistan
India
Vietnam
Sri Lanka
15%, it is down from 17% in 2002
35%, it increased from 25% in 2002 to 35% in 2012
39%
28%
In Pakistan Gross capital formation to GDP is declining, in contrast average gross asset
formation in other countries are showing an increasing trend.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT
Improvement of Economic indicators:

Status of Saving in Economy
According to world Bank, savings to GDP in Pakistan is the lowest in the region,
comparable ratios for other countries are as follows:

Pakistan
22%
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India
34%
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Bangladesh 35%

Sri Lanka
32%
it is down from 26% in 2002
it has overtaken Pakistan during last 6 years
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT
Improvement of Economic indicators:
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Low deposit rates discourage savings and foster illegal channels

Average banking deposit rate in Pakistan stood at 8% in 2013 while inflation
has been ranging at 11-13% reflecting negative return of 3-5% on banking
deposits.
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This saving rate is also disproportionate when compared to the region and
their respective inflation, discount rate and lending rate.

This discourages the masses from saving and fosters un-documented channels
and flight of capital.
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On the flip side, banks enjoy hefty return on lending and investments, thereby
yielding the sector an average spread of around 8-9% in 2013, which is even
higher than what the actual deposit holder earns.

Recently, the banking sector in Pakistan has been posting unmatched return
on equity and growth in profitability.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
BROADENING OF TAX BASE, PROMOTION OF
INVESTMENT & EMPLOYMENT
Incentive for Economic indicators:

Markup Rates
Markup rates in Pakistan and in other regional countries are as follows:
Pakistan
14.15%
India
6.25%
Bangladesh
6.00%
China
6.31%
The rates in Pakistan are more than twice that of the other countries which
results in higher cost of Production and cost of inflation, besides restricting
exports, encouraging imports and putting pressure on foreign exchange and
reducing the Pak Rupee value against major currencies of the world.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
DECISION REQUIRED
The presentation consists of following segments:
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Infrastructure Planning
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Reduction in markup rates for industrial credits
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Large scale manufacturing, Small and Medium Enterprises
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One window operation for labour related levies
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
DECISION REQUIRED

Infrastructure Planning
Efficient Infrastructure Planning is always a neglected sector in our country. We strongly
Urge GOP to trigger long-term strategic plan for infrastructure development. We propose
Following measures to be taken on war footing:

New Industrial estates and parks to be made and existing ones to be upgraded.

Expediting Thar Coal Projects and other such avenues of cheap production of
electricity.
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Identification of Hydel Power Projects and allow private sector to invest on BOT
basis and on open bidding method.
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Lease unfarmed land to investors on Private Public Partnership basis and
encourage corporate farming.
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Use of drip irrigation and provide interest free loans to farmers for using this
technology.
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Explore deep sea exploration and desalination of water for domestic and
industrial use.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
DECISION REQUIRED

Reduction in Mark-up Rate for Industrial Credit
 We believe that curbing growth now will dent Pakistan’s Economy further. Unless
we achieve a reasonable growth of about 4% to 5%, our economy will face
stagnation and our problems will compound further. We propose lower mark-up
rates for industrial credits, which will go a long way in poverty alleviation.

Large Scale Manufacturing - LSM
 LSM should be provided all facilities as they are one of the major employment
providers. In fact our core assets are Agriculture Land and Human Resource –
Skilled and Un-skilled. Solution to our future growth is based on using them
efficiently. We strongly feel that a concrete plan on these accounts should be a
part of our next year’s fiscal measures backed by Sovereign Guarantees.

Small and Medium Enterprises - SME
 SME’s are equally important players in the country and all efforts to be made for
its promotions as well, including setting up of separate industrial estates.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
DECISION REQUIRED
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One Window Operation for Labour Related Levies and Effective use of collected
funds

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We propose to merge all labour related departments like EOBI, Social Security
(all provinces) into one and funds collected for labour related levies shall be
utilized through a professionally constituted board. We also propose that their
Investments in safe securities, instead of investing a portion in risk oriented
propositions.
Other Important Areas

Loans on machinery should be given at lower interest rate (say 5%) for
establishment of the industries in the country.

The work on maintenance of existing infrastructure and its further
development and shortage of electricity and gas should be overcome on war
footings, and in the meantime, industry be facilitated to import generators free
of taxes and duties.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS
The presentation consists of following segments:

Sectorial Revenue Contribution

Real Estate Valuation

NADRA Data Base
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Austerity Measures
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Curbing Discretionary Powers of Officials
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS
Sectorial Revenue Contribution
The contribution of tax to GDP as compared to the tax to GDP contribution is very lopsided.
Section
Share in
GDP
Tax to
GDP
-
Agriculture
21%
1%
-
Manufacture
19%
51%
-
Electricity, Gas, Mining & Construction
7%
14%
-
Transport, Storage & Communication
10%
7%
-
Wholesaler & Retailer
18%
6%
-
Finance & Insurance
7%
5%
-
Other Services
18%
16%
100%
100%
Review of the collection of tax also reveals that the direct to indirect taxes are 1/3 : 2/3
which primarily is reverse of what it should be.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS
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Real Estate Valuation and Consequent Reduction in Stamp Fees

A formula for determination of market value of real estate has to be evolved
through market surveys

Incentive to owners should be given by bringing Collector Value in close
proximate to market value
NADRA Database

To curb Parallel Economy and to promote tax culture, effective use of NADRA
database by FBR is indispensable to apprehend alleged tax evaders without
discrimination.

Identification of CNIC must be done before executing major transactions including
buying and selling of properties, valuable assets of more than Rs.500,000/-, we
are proud to mention here that the GOP has recently announced that CNIC (for
individuals) will replace NTN which will go a long way towards documentation of
the economy, this was being demanded by our BAR for a number of years.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS

Austerity Measures
We understand that the GOP is working to reduce expenses, we would like to highlight
couple of key items as follows:



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Rationalizing size of cabinet, management & staff of Government Public Companies
Capping of Administrative expenses
End of VIP culture
Curbing Discretionary Powers of Officials

Using Discretionary Power is one of the biggest avenue of corruption and indirectly
triggers black economy. We, at KTBA strongly, believe that GOP must put safety
valves on use of discretionary powers especially in fiscal laws

Further incase of detecting wrong decisions or miss declaration, fine is levied by tax
official on taxpayers, therefore, justice and equity demand that it should be equally
applicable to the concerned officials for wrong decisions as well, where tax payers
are proved to be right.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS

Selection Of Persons or Classes of Persons For Audit
[Section 177 & 214(c)]
Cases of taxpayers filed are considered as finalized under self assessment.
However, cases were being selected for audit under section 214(c) by FBR through computer
balloting.
Powers have been given to commissions to select cases for audit under section 177, which
has now been started to be misused, and this is creating harassment for the taxpayers.
This is in addition to cases being selected under section 122(1)/122(5)/122(5A) etc.
It is suggested that there should be some restriction put on the commissioner before
selecting a case under section 177 or using the power under section 122.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS

Recovery Of Taxes
It has been noticed that the past few years, frivolous demands are created and the recovery
starts immediately after the expiry of the time limit of 15 days.
It is therefore, proposed that to avoid harassment, tax demand of only 15% should be
recovered upto the first appeal and an additional 35% upto the tribunal level. This measure
will go a long way in reducing harassment and also corruption. (This was prevalent in the past
and had reduced the corruption to a considerable level.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS

Increasing The Threshold For Withholding Tax
[Section 153]
In 1999 through SRO 586(1)/91 dated June 30, 1991 the threshold for deduction of tax
was fixed at


Rs. 25,000/- For Goods
Rs. 10,000/- For Services
Since these were fixed about 15 years ago it is proposed that the threshold should be
increased to Rs. 200,000/- and Rs. 100,000/- respectively.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS

Taxability Of Provident Fund Contribution
Sub-rule (a) of Rule 3 of the Sixth Schedule provides that any contribution made by an
employer to a provident fund in excess of 10% of the salary or Rs. 100,000/-, whichever is
lower, shall be deemed to be income of the employee.
Proposal
We suggest that the deeming of income of an employee may be restricted to 10% of salary
only and the restriction of monetary amount of Rs. 100,000/- per annum may be removed.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS

Computation Of Capital Gains On Disposal Of Securities By The Non-Residents
•
Non residents invest money in foreign currency converted to Pakistani Rupees.
•
When sold, capital gain is calculated in historical terms (Pakistani Rupees).
•
Profit arises, however there could be actually a loss.
•
India Income Tax Act, 1961 – Section 48.
Proposal
Similar amendment be made in Section 76 of the Ordinance.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS

Separation Of Tax Judicial System From Collection machinery
The present scheme of tax appellate authorities being under the control of the executive side
of the tax machinery has been an obvious impediment in providing quick justice to the
taxpayers and as such it has been time and again proposed that the judicial side should be
made independent of the executive side with no cross border movement from one side to
the other; being also a constitutional requirement. This aspect needs immediate attention so
that the system be brought in line with the provision of the Constitution of the Islamic
Republic of Pakistan. We feel that adjudicating officers may be removed from subordination
of FBR. Appellate Forums should work under the respective High Courts Instead of FBR.
Proposal
It is proposed that the tax judicial system should be given under the control of a Chief (placed
in every province), who may be a Judge of the High Court or Supreme Court of Pakistan and
the hierarchy can be created under the said Chief.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS

Default Surcharge / Penalty
The basic intention of the law to impose any penalty or additional tax was to educate the
taxpayers and to discourage the taxpayer from delaying the payment. However, the rates of
the charge have become so unreasonable as the GOP has now made it a source of revenue.
In a recent case reported as CIT Karachi V. Messrs General Tyre and Rubber Co. 108TAX359 &
2013PTD387, it was held that the imposition of penalty/additional tax should not be made a
source of revenue for the government.
It is therefore suggested that the default surcharge should be brought down to reasonable
limits.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS
Revision Of Return By Taxpayers
[Section 114(6)]
Now revision of return/wealth statement can not be done without the
permission of the Commissioner.
Approval of Commissioner is not accorded for a long period, hence
revision of returns is not possible.
It is hence proposed that a time limit (say 15 days) should be incorporated
and after the said period the computer access should be automatically
available.
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS
Credit For Deduction Of Tax
When the deducting authority deducts tax and deposits the same to the
government treasury, the person from whom the deduction is made has
to run from pillar to post to get the credit.
It is proposed that since the NTN/CNIC of the said person is mandatory,
credit should automatically to available to the said persons e-portal
account
INCOME TAX PRE-BUDGET PROPOSAL 2015-16
OTHER IMPORTANT ITEMS
Active Taxpayers
The new section introduced for active taxpayers is not available for
i.)
ii.)
Taxpayers who file manual return
New taxpayers
It is therefore, suggested that all returns filed should be immediately
incorporated in the said list and for those who take the NTN for the first
time, they should be on the said list till the next date of filing of returns.